Court Clears Way for AT&T-TWI Merger, Urges DoJ Not to Seek Stay

Senior U.S. District Judge Richard Leon today rejected the Justice Department’s attempt to block AT&T, Inc.’s proposed acquisition of Time Warner, Inc., but the Department of Justice left the door open to appealing the decision, while AT&T looked to close the transaction in the next eight days.

Judge Leon said that “the Government has failed to meet its burden to establish that the proposed ‘transaction is likely to lessen competition substantially.’”

The judge also said that he “could not, and would not,” grant a stay “in the first instance” if the government were to request one. He said that he did not believe the government would have “a likelihood of success on the merits of an appeal,” which is one of the factors to be considered in weighing a motion for stay.

“And in my judgment, given that our Circuit Court has never hesitated to unwind an unblocked merger if the law and facts warrant doing so, there would be no irreparable harm to the Government — only to the defendants — if my ruling were stayed,” he added.

“That of course is not to suggest in any way that the Government should not consider seeking appellate review of the merits of this Court’s decision. That is, by any standard, fair game. But the temptation by some to view this decision as being something more than a resolution of this specific case should be resisted by one and all!” Judge Leon continued.

He added, “To use a stay to accomplish indirectly what could not be done directly — especially when it would cause certain irreparable harm to the defendants — simply would be unjust. I hope and trust that the Government will have the good judgment, wisdom, and courage to avoid such a manifest injustice. To do otherwise, I fear, would undermine the faith in our system of just not only for the defendants, but their millions of shareholders and the business community at large.”

Assistant Attorney General–Antitrust Makan Delrahim said in a statement, “We are disappointed with the Court’s decision today. We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner. We will closely review the Court’s opinion and consider next steps in light of our commitment to preserving competition for the benefit of American consumers.”

AT&T General Counsel David McAtee said in a statement, “We are pleased that, after conducting a full and fair trial on the merits, the Court has categorically rejected the government’s lawsuit to block our merger with Time Warner. We thank the Court for its thorough and timely examination of the evidence, and we compliment our colleagues at the Department of Justice on their dedicated representation of the government. We look forward to closing the merger on or before June 20 so we can begin to give consumers video entertainment that is more affordable, mobile, and innovative.”

Late last year, AT&T and Time Warner agreed to effectively extend the termination date for their merger agreement until June 21 by each waiving until that date their rights under the original agreement to terminate it for failure to close by April 22 (TR Daily, Dec. 22, 2017). The original termination date in the merger agreement struck in 2016 was Oct. 22, 2017, but in October of last year they had extended the deadline to April 22, 2018 (TR Daily, Oct. 23). At that point, the proposed transaction was still under review by the Justice Department, which filed its antitrust lawsuit seeking to block the transaction later in the fall (TR Daily, Nov. 20).

In “U.S. v. AT&T, Inc., et al.” (case 1:17-cv2511-RJL), the Justice Department was challenging a vertical merger for the first time in decades. It argued that vertical integration of content creation and programming distribution would hurt competition and drive up prices for consumers.

AT&T, TWI, and AT&T’s Directv subsidiary, which was also named in the DoJ lawsuit, argued that the merged company would lose money by withholding TWI content from competing distributors, and that consumers would benefit from the efficiencies created by the merger. Shortly before the case went to trial, TWI had made a commitment to continue licensing its content to third-party distributors, with disputes subject to “baseball-style” arbitration.

The department’s opposition to the merger was the subject of some controversy about possible interference from the White House, with AT&T mounting an unsuccessful attempt to obtain information on contacts between the Trump administration and the Justice Department, in an effort to show that the department’s opposition to the merger was influenced by the president and his negative views of Time Warner’s CNN news channel (TR Daily, Feb. 20).

“If ever there were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one. Small wonder it had to go to trial!” Judge Leon said in his 172-page memorandum opinion released today.

In evaluating the strength of the government’s arguments regarding the harm posed to competition and consumers by the merger, “I must be able to put it in the context of other documents and statements related to the various rationales for the proposed merger, including, of most relevance here, defendants’ asserted desire to compete with SVODs [subscription video-on-demand services] and other technology companies amid ‘the ongoing revolution in video programming and distribution.’ … Therefore, although the Government is of course correct that the refrain ‘“we are getting killed by new competition in different markets”’ is no ‘defense to an illegal merger,’ Gov’t Post-Tr. Br. 21, I simply cannot evaluate the Government’s theories and predictions of harm, as presented by the Government at trial, without factoring in the dramatic changes that are transforming how consumers view video content,” Judge Leon said.

In considering the parties’ differing arguments regarding the potential for the combined company to charge competing distributors more for TWI’s Turner cable network content, including CNN, TNT, and TBS, Judge Leon said that “the Court unfortunately does not have the luxury of looking to judicial precedents applying the increased-leverage theory in the context of a Section 7 [of the Clayton Act] challenge to a vertical merger. Indeed, the Government has not pointed to any prior trials in federal district court in which the Antitrust Division has successfully used this increased-leverage theory to block a proposed vertical merger as violative of Section 7.”

He said that “in this matter of first impression” he concluded that “the Government has failed to clear the first hurdle of showing that the proposed merger is likely to increase Turner’s bargaining leverage in affiliate negotiations; I thus need not consider the separate legal question of whether any effects associated with the Government’s increased-leverage theory would result in a substantial lessening of competition for the purposes of the Clayton Act’s prohibitions.”

The FCC has no authority over the transaction, as Time Warner sold its only broadcast station to Meredith Corp. last year (TR Daily, April 17, 2017), and thus no FCC-issued licenses will be transferred in connection with the merger.

Reactions, negative and positive, followed swiftly in the wake of the long-awaited ruling, with some of the critics tying the impact of the decision with the FCC’s restoring Internet freedom order that took effect yesterday (TR Daily, June 11).

House Judiciary Committee ranking minority member Jerrold Nadler (D., N.Y.) said, “While I was skeptical about President Trump’s seemingly political motivations for opposing the AT&T-Time Warner transaction and remain deeply concerned about potential political interference in antitrust enforcement matters, I am nonetheless disappointed in today’s court decision approving the transaction. I am deeply concerned that this ruling may invite a wave of consolidation that will fundamentally transform the media and communications industry. This decision could make it extremely difficult for the antitrust agencies to fulfill their congressionally mandated duty to promote competition and prevent mergers that may substantially lessen competition.”

Sen. Amy Klobuchar (D., Minn.), the ranking minority member of the Senate Judiciary Committee’s subcommittee on antitrust, competition, policy and consumer rights, issued a statement saying, “Allowing this merger to proceed raises serious concerns for consumers and the future of American media, and also sends a troubling signal to others that it’s open season for vertical mergers that could allow a company to raise the cost of essential products and services that its rivals need to compete, leading to higher costs for consumers and less innovation. I urge the Justice Department to take swift action to appeal this judgment to ensure that competition and consumers are protected.”

Sen. Ed Markey (D., Mass.), a member of the Senate Commerce, Science and Transportation Committee, said, “This ruling is an assault on consumers, choice, and innovation. The telecommunications market needs more competition, not more consolidation. We need a telecommunications market where pay-TV gatekeepers don’t favor their own content providers, but allow minority, diverse, and independent programmers to reach Americans’ screens. I fear this decision will only further fuel merger mania in the telecommunications and other markets.” Sen. Markey added, “Today’s decision underscores the need to restore robust net neutrality rules, so broadband providers like AT&T cannot use their gatekeeper role to harm competing services and content. Without net neutrality protections in place, AT&T will be free to block, slowdown, or charge fees to competitors like Netflix and Hulu to favor their own DirecTV Now streaming service and HBO content. Speaker [House Speaker Paul] Ryan [R., Wis.] should schedule an immediate vote on my CRA resolution to restore the FCC’s net neutrality rules.”

Incompas Chief Executive Officer Chip Pickering said, “AT&T is getting the merger no one wants, but everyone will pay for. While the world focused on the merger, AT&T has been lobbying the FCC to cut off broadband competition in rural America and raise prices on consumers, small businesses and schools.

“Without question, a bigger, more powerful AT&T in a world absent net neutrality is a very, very dangerous proposition for consumers and content creators who have thrived during the streaming revolution. Now is the time for Congress to listen to the 80 percent of Americans who are demanding that a free and open internet become the law of the land. With a broadband monopoly in one hand, and paid prioritization in the other, AT&T poses a threat to fiber deployment and the streaming revolution,” Mr. Pickering added.

“We believe net neutrality should have been part of the DOJ’s case, and we believe critical merger information from the ISP’s should be included in our court challenge to the FCC’s net neutrality repeal,” the Incompas CEO said.

In a statement, the American Cable Association said it was “disappointed that the Court did not block the AT&T/Time Warner merger or did not enhance the commercial arbitration offer made by AT&T/Time Warner, which did not apply to HBO and had other major flaws. The Court’s decision runs counter to numerous findings over the past 15 years by the Federal Communications Commission (FCC) and Department of Justice (DOJ) that vertical combinations between video programmers and distributors require robust conditions to constrain the incentive and ability of the combined firm to raise prices to rivals and reduce choice. For these reasons, the Court’s opinion is out of the mainstream.”

ACA added, “The FCC and DOJ should continue to rigorously review existing and proposed vertical combinations and impose sufficient remedies to offset their harms. Most importantly, the FCC and DOJ need to examine the harms that have flowed and will continue to flow from the Comcast/NBCU combination, which has a larger share of the markets it serves and controls more essential programming in these markets, including regional sports networks and local broadcast stations. In light of the existence of the AT&T/Time Warner commercial arbitration offer, the agencies should constrain the firm’s behavior, at least by imposing that same requirement on the Comcast-NBCU combination. The agencies also should prevent Comcast-NBCU from acquiring any additional firms, such as Fox, which would only increase its ability to harm consumer welfare.”

In a statement, Public Knowledge Senior Counsel John Bergmayer said, “This is a disappointing result, and we expect the government will appeal. In the meantime, not only may consumers be harmed directly by the anticompetitive harms that this merger will cause, such as higher bills and fewer choices of programming and provider, but also by the many other mergers it will encourage. Now, more than ever, we need reinvigorated regulatory oversight of the video marketplace — such as program access and program carriage rules — to ensure that smaller distributors and programmers, and consumers, aren’t harmed by an increasingly uncompetitive market. Additionally, the harms this deal will cause demonstrate why broadband users need strong, enforceable net neutrality rules on the books.”

Mr. Bergmayer added, “Despite the outcome, we applaud the DOJ’s work in this case, including highlighting the dangers this merger will cause to the American people. Hopefully one bad decision will not dissuade the Antitrust Division from vigorously enforcing the nation’s antitrust laws, including by challenging mergers in court when appropriate.”

Free Press Director–policy Matt Wood said, “We disagree with Judge Leon’s decision, but it wasn’t an unexpected outcome. Unfortunately, the Justice Department brought a very narrow case against the merger, choosing to focus solely on AT&T’s incentives to foreclose other cable distributors’ access to cable programming.”

“This deal’s likely harms are much broader. DoJ didn’t raise the very likely potential for AT&T to use its market power to favor online content and over-the-top video services it owns. This was a central issue even in the Comcast-NBCUniversal merger, the last massive vertical merger between a broadband company and content company,” Mr. Wood continued.

“Now that AT&T is free for the time being of all federal Net Neutrality obligations, there is literally nothing stopping it from using its power in the broadband market to discriminate and favor its own content and services. Perhaps DoJ declined to focus on this probable harm because of the Trump administration’s hostility to the very popular Net Neutrality rules that the FCC just repealed,” he added.

“But the harms that DoJ ignored don’t stop there. AT&T’s trial testimony made clear that it views this deal as a way to increase its profits from targeted advertising. AT&T, unlike other edge-company advertising giants, has knowledge of every click its broadband customers make. With the dismantling of the FCC’s 2015 privacy protections, a combined AT&T-Time Warner will be able to surveil its customers across the entire internet and target ads to them in ways that even Google and Facebook would be hard-pressed to match,” Mr. Wood said.

Joshua Stager, policy counsel at the New America Foundation’s Open Technology Institute, said, “Today's ruling is a loss for consumers and the American economy. The telecommunications market is badly broken, and this merger will only make it worse. AT&T is a serial offender on net neutrality and the poster child for destroying competitive markets. The Justice Department was right to bring this case on behalf of the American people and right to recognize that vertical deals can threaten innovation.”

Mr. Stager added, “Ultimately, this is just one case decided by one judge, and an appeal is likely. The American people need strong antitrust enforcement, and we urge the Justice Department to continue its vigorous scrutiny of the telecommunications industry. Today's ruling also underscores why Congress must restore the net neutrality rules that helped keep AT&T in check.”

Jonathan Schwantes, senior policy counsel for Consumers Union, said, “Allowing these two giants to merge hands AT&T control of not only the largest distribution platform, but some of the most valuable content on television today. There is significant opportunity for AT&T to exploit the value of Time Warner’s content in ways that could hurt both consumers and competition alike. This merger, combined with the repeal of net neutrality protections earlier this week, is a big loss for consumers.”

Mr. Schwantes added, “Moreover, today’s decision might as well have been the starting gun for the race to consolidate, with other huge mergers on the horizon. Unfortunately, history has shown us that when these telecom companies get bigger, they don’t get better. Comcast’s reported bid to purchase 21st Century Fox is cause for consumer concern, especially as the company failed to live up to the conditions of its last mega-merger — and those conditions are set to expire later this year. Consumers are finally starting to see some competition in the video market, with new, innovative over-the-top streaming services. But today’s decision could effectively extinguish that trend, with consumers losing out on these innovative platforms [that] simply can’t compete with these massive companies without raising prices.”

Open Markets Institute Director–legal policy Lina Khan, said, “The DOJ should appeal the decision and ask the D.C. Circuit to overturn Judge Leon’s misguided opinion. An appeal is critical not only for maintaining the existing level of competition in video distribution, but also for ensuring that antitrust remains a strong tool against anticompetitive vertical mergers.”

Open Markets Institute Policy Counsel Sandeep Vaheesan said, “Despite today’s defeat, the Department of Justice deserves credit for pursuing this case and should continue to challenge anticompetitive vertical mergers. In recent years, government had responded to anticompetitive vertical deals by accepting complicated behavioral remedies. Breaking with recent practice, the DOJ recognized that the only way to preserve competition in the market for video programming and distribution was to block this deal.”

Other parties, however, praised Judge Leon’s decision.

Ryan Radia, research fellow and regulatory counsel at the Competitive Enterprise Institute, said, Today's decision by the U.S. District Court for the District of Columbia to approve AT&T's acquisition of Time Warner is a win for consumers. The government failed to offer persuasive evidence that the transaction would harm competition or consumers.”

Mr. Radia added, “Meanwhile, America's media sector has experienced a wave of deconsolidation and entry over the past three decades, so today’s decision is a return to normalcy. Original video production is at an all-time high, a trend that industry observers have long recognized is unsustainable. By joining forces, AT&T and Time Warner will be better positioned to monetize content, in turn incentivizing the merged company to invest more in original programming. Meanwhile, satellite and cable providers such as Comcast, Charter/TWC, Cox, and Dish Network remain well-positioned to bargain aggressively with AT&T-Time Warner over the price of content. And with stand-alone Internet video offerings such as Hulu, Amazon Prime, and Netflix all competing aggressively, there’s no shortage of competition in the streaming space.”

Free State Foundation senior fellow Theodore Bolema said, “This challenge by the Department of Justice was a throwback to the 1970s and earlier, when vertical mergers were challenged using dubious theories of economic harm. Judge Leon was correct in finding that the government failed to plausibly show that AT&T would pay $85 billion to buy Time Warner only to damage the Time Warner assets by withholding programming from competitors to help AT&T’s other business interests. Hopefully when the DOJ is evaluating upcoming acquisitions, like Comcast’s bid to acquire Twenty-First Century Fox assets, it will follow the example of both Republican and Democratic administrations and only challenge vertical mergers, if at all, if the case is supported by sound economic analysis.”

Comcast Corp. was widely expected to move forward with an announcement regarding Twenty-First Century Fox tomorrow if today’s court ruling was favorable to vertical mergers.

TechFreedom President Berin Szóka said, “Today’s decision is a victory for the rule of law. This lawsuit was never intended to do what antitrust is supposed to do: protect consumers from the abuse of market power. There’s been a bipartisan consensus for decades that purely vertical mergers are highly unlikely to harm consumers, and that surgical merger conditions can address potential consumer harms. The Trump DOJ simply ignored that consensus. Fortunately, unlike in other areas, this isn’t a policy question; it’s a legal one — with right and wrong answers. The Trump DOJ’s legal and economic theories were so baseless that the court went out of its way to urge the DOJ not to appeal or even to seek a stay upon appeal. This wasn’t a remotely political decision: it was simply an application of well-established antitrust principles to the facts of this case.” —Lynn Stanton, [email protected]

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